Notes From Underground: I Knew I Would Return

Last week’s FOMC meeting proved BORING and left me speechless … but not thoughtless. The only phrase of significance was the use of “RELATIVELY SOON” in placing some forward guidance to the beginning of quantitative tightening (h/t Boockvar). We have no idea what “relatively soon” means but I continue to ask: WHY WAIT? Yes, it may be because the FED is nervous about the potential of DEBT CEILING caused by a Congress filled with know-nothings and do-nothings clogging the day-to-day financing of government operations.

What seems certain is that the FED is afraid of its shadow. The market seems to believe that recent inflation data will prevent the FED from raising the fed funds rate because of the inability of price inflation to meet the FOMC‘s 2% target. If Yellen and Co. are not going to raise rates further then IT IS TIME TO SHRINK THE BALANCE SHEET. Again, because the ECB and BOJ continue to provide the liquidity backdrop via large-scale asset purchases the impact from any FED action will be MINIMAL. As the Great Rabbi Hillel asked, “If I am not for myself, who will be for me? If I am only for myself what am I? IF NOT NOW,WHEN?”

***THE MOST PERPLEXING TRADE. What is going on with the Swiss franc trade? The last three weeks the Swiss franc has depreciated 5% versus the EURO and also against all of the commodity currencies — Canada, Aussie, Kiwi. It’s even losing ground to the weak U.S. dollar. Some analysts are maintaining that the Swiss is weakening against all currencies because the fear of populism in Europe has lessened and therefore the safe haven status of the Swiss franc has been diminished.

If the safe haven argument is to be accepted then the question becomes WHY IS IT THAT GOLD IS 2% higher in the same period? Gold is very much a safe haven asset as the Swiss franc and until recently the Swiss franc has actually outperformed GOLD even though the Swiss currency has a negative carry attached to it. Notes From Underground has argued for two years that the Swiss have created the greatest act of ALCHEMY in the history of global finance: Using the printing press to create Swiss francs and sell them for a basket of international basket of stocks and bonds.

If the Swiss were in fact embarking on a QT program the franc should be rallying as the Swiss National Bank (SNB) would be selling foreign stocks and repurchasing the massive amount of francs floating in the financial system. Besides the HUGE profits the SNB has amassed by purchasing ever appreciating STOCKS it would behoove them to embark on a QT program of its own, especially because the EUR/CHF cross is at 1.1500. The SNB has bought massive amounts of EUROs in an effort to keep the FRANC from further appreciation. The EUR/CHF’s initial FLOOR was 1.20, which the SNB vacated on January 15, 2015. Since the end of the PEG the SNB has purchased 200 billion Swiss francs of foreign assets in an effort to weaken the currency and the result has been to make the SNB the world’s major sovereign wealth/hedge fund. It is difficult to know what the average price the SNB has been purchasing the EURO/CHF cross but the present price of 1.1500 must leave the SNB with a potential profit. WILL THE SWISS UTILIZE THE PRESENT FRANC WEAKNESS TO EXTRICATE ITSELF?

This is a critical question to consider. But the question remains: Is the Swiss franc weak because the SNB has finally succeeded in its policy of QE coupled with negative interest rates? Last week I wrote that the SNB President Thomas Jordan was jawboning the franc lower again but he has been doing that for two years so nothing new. Or, maybe the election of Macron and the strength of Merkel’s poll ratings have calmed the nerves of European investors and therefore the EU’S investors are bringing cash home? This may have some validity but with European short-term rates also in negative territory and the ECB buying 60 billion of assets a month the strong European economic story is a work in progress, especially with the continued burden of the Italian non-performing loans overhanging the EU financial system.

The Dow Jones wire service had an article today titled, “Switzerland’s First-World Problem: What to do With $750 Billion?” Some Swiss politicians are putting forth legislation proposing liquidating the massive profits of the SNB and share it with the country. The article notes that the legislation will not pass but the question for me remains: If the Swiss Bank would embark a tightening program why would the Swiss franc be in a weakening mode? Who IS DIVESTING OF SUCH LARGE AMOUNTS OF SWISS FRANCS? What implications does it have for the global financial system?

***Thursday the Bank of England will announce its interest rate policy. The consensus is for NO CHANGE in either the RATE or the asset purchase facility. Because the previous Monetary Policy Committee vote was 5-3 with three voters in favor of raising rates or shrinking the balance sheet. Watch the vote but I raise the idea that the BOE MAY follow the FED and raise rates 25 basis points. Why? The British pound has weakened against its main trading partner, the EU, by almost 3% giving the BOE an excuse to raise rates in response to the recent increase in British inflation. Again, the market has a BOE rate change as an 8% odds, but with the previous vote and a recent uptick in inflation the BOE has room to move. The economic collapse that the BOE feared following the Brexit vote has never materialized. Mr. Carney, it is time to admit your previous panicked-induced policy error and begin a readjustment process. RAISE RATES. If not now, when?

11 Responses to “Notes From Underground: I Knew I Would Return”

In Nov. 2015 Brainard opposed Fed tightening because of the strong dollar and the effect of any tightening in rates vis a vis the $. She went so far as to to say the increase in value of the dollar was a
de facto tightening.

Based on Brainard’s previous analysis, she must be thinking that with the dollar at 118 up from 105 the Fed should go forward sooner with QT and the rate increases/normalization.

The small negative rates in Europe pale in comparison to the currency exchange loss in the last 4 months for those trying to get higher american rates. The euro repatriation is in full swing and 1.20 looks like the next test.

I recognize the Euro strength is part the Macron effect and stronger Euro economy, as well as cleaning up some of the Italian bank mess. The other question is what part is the Euro strength based on the dysfunction in Washington.

As for the SNB being a seller of their stock gains, who knows maybe they are selling US stocks and buying gold with their profits. I agree with you going forward the SNB looks less likely to continue to be a strong buyer of American equities and bonds and in all liklihood a seller.

In any event bonds and stocks at these levels look very lofty and the stock gains are aggregated in fewer stocks.

But then who knows should a weak employment number hit on Friday. As we all know the Fed/Janet is supposedly “data dependent.”

Despite the 20% collapse of the dollar this year, seems Ms. Brainard perpetually sees cause to remain loose. Never mind that . the financial conditions index remains excessively loose, as even the dovish William Dudley has warned, correctly suggesting that remaining too loose in the last cycle helped cause the last financial crisis. GFC 2.0 is being baked in the cake, as Mr Dudley no doubt realizes, and this Fed is largely to blame – even though most of its current members will likely be gone when the “never will happen again in our lifetime” financial crisis strikes.

Frank c–good points and I refer you back to my analysis of Brainard’s speech a week before the FOMC meeting where she said that beginning QT would be less dollar impactful then raising the fed funds rate

Pray tell, why does the Fed now target 2% inflation? That’s currency destruction as it means prices double every 3 decades, which is devastating for savings and pensioners. The Fed’s mandate is PRICE STABILITY, which implies 0% inflation, not 2% or -2%. Indeed, for decades the Fed and its chair, William McChesney Martin, considered any inflation to be both economic and moral corruption. Today, inflation is a lauded goal of the Fed. Little wonder that according to a new poll, over 60% of people under age 35 trust bitcoin more than dollars. This bodes ill for the future of sovereign currencies – which exist only on the whim of public confidence that is rapidly being lost among the next generation.

Arthur–are you Eugene Fama.What I would like to figure out who and what are the investors we are referring to—the Swiss is not indicative of the ETF investor but represent the controllers of massive global capital flows